At GuruFocus, we have a conservative valuation measurement called the Graham Number. The calculation of the number is:
Graham Number = Square Root of (22.5 x Tangible Book Value Per Share x Earnings Per Share)
The formula was derived from the book “The Intelligent Investor.” Ben Graham did not specifically give the formula, but he hinted at it with the following passages:
“A Current price should not be more than 1.5 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5. (The figure corresponds to 15 times earnings and 1.5 time book value. It would admit an issue selling at only 9 times earnings and 2.5 time asset value, etc.)”
Using the GuruFocus All-In-One Screener, I scanned for stocks that were trading for less than 70 percent of their Graham Number. For guru confirmation, I added the criteria of the stock being held by at least 5 gurus. Since the Graham Number is based on earnings and book value, I also screen for stocks that had recent increases in those numbers. The screen resulted in 9 stocks. One of the results was SLM Corp (SLM), the old Sallie Mae. I kicked that one out because its financials have not been adjusted for the recent spinoff of Navient (NAVI). Here are the rest of the results:
Citigroup Inc (C) 46 gurus
Market Cap: 151.16 billion, P/E: 11.30, Dividend Yield: 0.08%
Business Predictability: 1/5, Financial Strength: 6/10, Profitability & Growth: 6/10
Citigroup is a global diversified financial services holding company, whose businesses provide consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transactions services, and wealth management. Citi has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. Earnings for the first quarter of 2014 were flat compared to the previous year. While earnings have leveled off, the book value has continued to grow at a rate of about 5 percent per year over the past 5 years and 6 percent year-over-year. The stock is currently trading at a 35 percent discount to its Graham Number of $76.56. It is held by 46 gurus we follow with James Barrow of Barrow, Hanley, Mewhinney & Strauss having the largest holding of 22.2 million shares, representing 0.73 percent of the shares outstanding.
American International Group Inc (AIG) 39 gurus
Market Cap: 79.48 billion, P/E: 9.80, Dividend Yield: 0.82%
Business Predictability: 1/5, Financial Strength: 6/10, Profitability & Growth: 5/10
AIG is a leading global insurance company. It provides a wide range of property casualty insurance, life insurance, retirement products, mortgage insurance and other financial services to customers in more than 130 countries and jurisdictions. The earnings at AIG have been erratic, but have remained on the positive side. For the first quarter of 2014, earnings were down 26.8 percent year-over-year. Book value has been consistently growing since 2011 and has grown 4.6 percent over the past year. The stock is currently trading at a 43.6 percent discount to its Graham Number of $97.58. The large jump on the chart in 2011 is an aberration due to its reverse split. The stock is currently held by 39 gurus we follow with Bruce Berkowitz of Fairholme Capital Management having the largest holding of 75.7 million shares, representing 5.13 percent of the shares outstanding.
Goldman Sachs Group Inc (GS) 31
Market Cap: 76.28 billion, P/E: 11.10, Dividend Yield: 1.30%
Business Predictability: 1/5, Financial Strength: 6/10, Profitability & Growth: 5/10
Goldman Sachs is a leading global investment banking, securities, and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Earnings have been stable over the past few years, but are down 6.2 percent year-over-year for the first quarter of 2014. Book value has been consistently growing throughout the years and has grown at an annual rate of 5.69 percent over the past 5 years. The stock is currently trading at a 32.6 percent discount to its Graham Number of $252.96. It is held by 31 gurus we follow with Warren Buffett of Berkshire Hathaway having the largest holding of 12.6 million shares, representing 2.81 percent of the shares outstanding.
Alleghany Corp (Y) 17 gurus
Market Cap: 7.21 billion, P/E: 11.60, Dividend Yield: 0.08%
Business Predictability: 1/5, Financial Strength: 6/10, Profitability & Growth: 6/10
Alleghany owns and manages operating subsidiaries and investments, anchored by a core position in property and casualty reinsurance and insurance, much in the fashion of companies like Berkshire Hathaway. Earnings have been increasing at a rate of 13.63 percent over the past five years and were up 5.2 percent for the first quarter of 2014. Book value has been consistently increasing at an annual rate of 9.68 percent for the past five years. The stock is currently trading at a 54.3 percent discount to its Graham Number of $949.50. The stock is held by 17 gurus we follow with Chris Davis of Davis Selected Advisers with the largest holding of 634,368, representing 3.78 percent of the shares outstanding.
Transocean Ltd (RIG) 16 gurus
Market Cap: 151.16 billion, P/E: 11.30, Dividend Yield: N/A
Business Predictability: 3/5, Financial Strength: 7/10, Profitability & Growth: 8/10
Transocean is a leading international provider of offshore contract drilling services for oil and gas wells. Earnings have turned positive for 2013 after having negative earnings for 2011 and 2012. For the first quarter of 2014, earnings increased 42 percent year-over-year. The company reversed its decreasing book value in 2013. Year-over-year, the book value is up 6.5 percent. The stock is currently trading at a 28.1 percent discount to its Graham Number of $61.78. It is held by 16 gurus we follow with PRIMECAP Management having the largest holding of 30.5 million shares, representing 8.47 percent of the shares outstanding.
Ensco Plc (ESV) 13 gurus
Market Cap: 12.77 billion, P/E: 8.90, Dividend Yield: 5.10%
Business Predictability: 1/5, Financial Strength: 7/10, Profitability & Growth: 8/10
Ensco, just like Transocean, is also a leading international provider of offshore contract drilling services for oil and gas wells. Earnings have rapidly grown at rates of 63.6 and 20.4 percent for 2012 and 2013 but decreased 8.1 percent in the first quarter of 2014. Book value has been consistently growing since 2010 and has grown 6.8 percent over the past year. The stock is trading at a 26.6 percent discount to its Graham Number of $74.70. It is held by 13 gurus we follow with First Pacific Advisors having the largest holding of 1.85 million shares, representing 0.79 percent of the shares outstanding.
Everest Re Group Ltd (RE) 11 gurus
Market Cap: 7.6 billion, P/E: 6.90, Dividend Yield: 1.66%
Business Predictability: 1/5, Financial Strength: 7/10, Profitability & Growth: 8/10
Everest Re’s principal business is the underwriting of reinsurance and insurance in the United States, Bermuda, and international markets. The company had high earnings of $25.44 per share in 2013 contributing to it very low P/E of 6.90. Earnings have come back down 17.2 percent in the first quarter of 2014. The book value has been consistently growing at an annual rate of 8.53 percent over the past five years. The stock is currently trading at a 43.2 percent discount to its Graham Number of $288.92. It is held by 11 gurus we follow with Mason Hawkins of Southern Asset Management having the largest holding of 4.47 million shares, representing 9.2 percent of the shares outstanding.
Unum Group (UNM) 10 gurus
Market Cap: 151.16 billion, P/E: 11.30, Dividend Yield: 0.08%
Business Predictability: 1/5, Financial Strength: 6/10, Profitability & Growth: 6/10
Unum Group is a leading provider of employee benefits in the United States and United Kingdom, offering a broad portfolio of products and services through the workplace. Earnings have slowly increased over the past two years and have increased 7.3 percent year-over-year for the first quarter of 2014. The book value has been steadily increasing at an annual rate of 6.57 percent over the past five years. The stock is currently trading at a 31.4 percent discount to its Graham Number of $50.96. The stock is held by 10 gurus we follow with Hotchkis & Wiley having the largest holding of 12.3 million shares, representing 4.66 percent of the shares outstanding.
